Bill D’Alonzo doesn’t want to own expensive stocks, but he’s not likely to be mistaken for a value-oriented investor.
D’Alonzo, the lead manager of the Brandywine Fund (BRWIX) for nearly 20 years, looks for companies whose bottom lines are increasing by 25%-30% per year or more.
“We’re dramatically, intensely focused on earnings,” he says. Moreover, he wants those profits to be the result of operations, not increased interest income or lower taxes. While he has no hard and fast rules about revenue growth, he prefers to see double-digit increases. Companies that he thinks will beat analysts’ estimates pique his interest, too.
As for share valuations, D’Alonzo says he prefers them to be “reasonable.” The stocks in the fund right now are selling at about 18 times projected 2004 earnings, he says.
Strong balance sheets are also on D’Alonzo’s list of desirable corporate characteristics, as are businesses that are gaining market share at a rate that will propel them to the top of their industry.
The team that oversees the fund can buy companies of any size, but its focus on rapid growth tends to push it into small and mid-sized ones, according to D’Alonzo.
The fund’s emphasis on growth hurt it in 2001 and 2002, when that style of investing was out of favor. The $3.9-billion Brandywine fund lost 20.6% and 21.7% those years. Compared to its peers, though, it didn’t fare badly. The average mid-cap growth fund declined 20.7% in 2001, and 26.2% the following year.
Over the long term, the fund has had strong returns. For the ten years ended in March, Brandywine has risen 10.3%, on average, versus 9% for its peers.
When investors warmed up to growing companies last year, Brandywine rebounded, posting a total return of 31.5%, although it lagged similar funds, which gained 35.8%. Through last month, however, Brandywine was ahead of its peers again, rising 4.4% while they gained 4%.
A recent addition to the fund is chip maker Fairchild Semiconductor Intl (FCS). D’Alonzo and his team began buying the company in late August because they saw it benefitting from increased demand for personal computers.
After posting losses in the first three quarters of 2003, Fairchild returned to profitability in the last three months of the year. D’Alonzo thinks its earnings could accelerate by 200% going forward.
The fund’s Fairchild shares cost $18.50 on average. The stock has been trading around $24 lately.